Ernst - Count down: the past, present and uncertain future of the big four accounting firms

When Emerald Publishing released the first edition of Count Down in December 2015, aiming chiefly at its core audiences in the academic and scholarly communities, it was also my desire to extend its reach more widely.

Recent months have not been happy for the Big Four accounting networks despite their extended market dominance and the growth of their combined global revenue, reaching $128 billion in the latest year making timely this revised and extended second edition:

• Deloittes Brazil firm in December 2016 incurred an $8 million penalty, the largest ever imposed by the PCAOB, and practice bars and other sanctions against twelve partners and employees, over confessed alteration of documents, false testimony, and lack of cooperation with the PCAOBs inspections and investigations. Lesser sanctions were also imposed on its firms in Mexico and the Netherlands for other PCAOB violations.
• EY in September 2016 was the target of two SEC enforcement actions, involving censures, fee disgorgements and fines of $ 4.4 million and $ 4.9 million, and practices bars against its personnel, over charges of loss of independence based on close personal relationships between engagement partners and client personnel in one case a romantic relationship and in the other, significant expenses paid for travel, entertainment, sporting events tickets, and family vacations for the client CFO and his family.
• KPMG in April 2017 fired five partners and an employee, including its Vice Chair of Audit and its head of Audit Quality and Professional Practice, over its receipt and handling of advance inspection information leaked by an employee of the PCAOB. Meanwhile in the United Kingdom, pressures remain on the Financial Reporting Council and the Financial Conduct Authority over their treatment of KPMGs role as auditor of failed bank HBOS.
• PwCs delivery of the wrong best picture envelope, and the resulting tumultuous ending to the February 2017 broadcast of the Academy Awards, evoked outbursts of public ridicule which were pale in significance compared to the potentially fatal financial impact of two multi-billion dollar lawsuits, relating to its audits of Colonial Bank and MF Global, where jury trials in process in August 2016 and March 2017, respectively, were discontinued in favor of settlements for confidential amounts.

The corrosive effects of these and other events on credibility and the public trust have left the Big Audit model increasingly fragile, yet still standing so far. While fresh issues will no doubt displace this sampling, the central issues retain their relevance and urgency, and drive the importance of their scrutiny.

Those with directly affected interests include not only the auditors, but all participants in Big Audit whose professional or business positions, activities, investments and financial security are exposed to the flaws in the structure by which the Big Four provide audit opinions on the financial statements of the worlds large public companies:

• Executive and financial leaders and the directors and audit committees of the corporate issuers.
• The community of financial information users: investors large and small, lenders, bankers, customers, and other sources of credit and capital.
• Professional standard-setters along with government agencies of oversight and law enforcement.
• And especially the accounting professionals themselves the partners and employees of the Big Four networks that dominate the sector, and their no-less-affected colleagues in the smaller firms.

Extending my appreciation for their support to the Emerald team led by Charlotte Maiorana, series editor Gary Previts of Case Western University, and my agent Carol Mann I believe in both the importance of assurance to the successful functioning of the capital markets and the necessity of full engagement by all parties in examining the challenges in todays model, and welcome this opportunity to contribute to the dialog.

Paris

May 2017